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July 2013 Pending Home Sales Index Declines

The pending home sales index for July was released by the National Association of Realtors (NAR) today, and our analysis suggests that August existing home sales will be marginally “less good”.

The current trends (using 3 month rolling averages) now shows a moderate deceleration in pending home sales.

Extrapolating this data to project August existing home sales, this would be a 5.2% gain year-over-year in July existing home sales, and the 27th month in a row of year-over-year gains.

Pending home sales are based on contract signings, and existing home sales are based on the execution of the contract (contract closing).

The NAR reported June pending home sales index down 1.3% month-over-month and up 6.7% year-over-year. The market was expecting contraction of 1.0% to an expansion of 0.2% (versus the contraction of 1.3% reported). Econintersect‘s evaluation shows the index growth decelerated only 0.5% month-over-monthand up 8.6% year-over-year.

Unadjusted 3 Month Rolling Average of Year-over-Year Growth for Pending Home Sales (blue line) and Existing Home Sales (red line)

/images/z pending2.png

From Lawrence Yun , NAR chief economist:

Pending home sales were down in July, with higher mortgage interest rates slowing the market, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 1.3 percent to 109.5 in July from 110.9 in June, but is 6.7 percent above July 2012 when it was 102.6; the data reflect contracts but not closings. Pending sales have stayed above year-ago levels for the past 27 months.

Lawrence Yun, NAR chief economist, said there is an uneven pattern around the country. “The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown. However, higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West,” he said. “More homes clearly need to be built in the West to relieve price pressure, or the region could soon face pronounced affordability problems.”

The National Association of Realtors (NAR) pending home sales index offers a window into predicting existing home sales. The actual home sale might appear in the month the contract was signed (cash buyers account for 31% of home sales in July according to the NAR), or in the following two months.

Econintersect evaluates by offsetting the index one month to project unadjusted existing home sales. Using this index offset one month suggests existing home sales of 500,000 in August 2013 (58,000 fudge factor this month for historical error using this methodology for the month of Julys in years past).

Using this methodology, 465,000 (negative 18,000 fudge factor) existing home unadjusted sales were forecast for July 2013 sales vs the actual reported number of 519,000 (which is subject to further revision).

Unadjusted Year-over-Year Change in Existing Home Sales Volumes

/images/z existing1.PNG

As shown on the above graphic, since mid 2011 home sales have been positively growing year-over-year. However, the strong rate of growth seen since mid-2010 appears to have moderated to a lower growth channel as shown on the graph above – although the strong showing in July has penetrated the top of the growth channel.

Keeping things real – home sales volumes are only 2/3rds of previous levels.

Caveats on the Use of Pending Home Sales Index

According to the NAR:

NAR’s Pending Home Sales Index (PHSI) is released during the first week of each month. It is designed to be a leading indicator of housing activity.

The index measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops. A signed contract is not counted as a sale until the transaction closes. Modeling for the PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years.

…… When a seller accepts a sales contract on a property, it is recorded into a Multiple Listing Service (MLS) as a “pending home sale.” The majority of pending home sales become home sale transactions, typically one to two months later.

NAR now collects pending home sales data from MLSs and large brokers. Altogether, we receive data from over 100 MLSs & 60 large brokers, giving us a large sample size covering 50% of the EHS sample. This is equal to 20 percent of all transactions.

In other words, Pending Home Sales is an extrapolation of a sample equal to 20% of the whole. Econintersect uses Pending Home Index to forecast future existing home sales.

Econintersect reset the forecasting of existing home sales using the pending home sales index coincident with November 2011 Pending home sales analysis (see here) – as the NAR in November revised the historical existing home sales data.

The Econintersect forecasting methodology is influenced by the speed at which closings occur. When they slow down in a particular period – this method overestimates. The number of cash buyers are speeding up the process (cash buyers analysis here). A quick cash home sale process could begin and end in the same month. On the other hand, contracts for short sales can sometimes take months to close. Interpreting the pending home sales data is complicated by weighing offsetting effects in the current abnormal market.

Please note that Econintersect uses unadjusted data in its analysis.

Econintersect determines the month-over-month change by subtracting the current month’s year-over-year change from the previous month’s year-over-year change. This is the best of the bad options available to determine month-over-month trends – as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).

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